globalization

For several decades, I’ve assumed that globalization is more-or-less inevitable. As communication and transportation costs decline, manufacturers find it ever easier to take advantage of lower labor costs in developing countries (a process known as labor arbitrage). But recent developments may result in a new phenomenon, often described as glocalization – a worldwide trend toward local production and consumption. Three trends stand out as especially important: fast fashion, changing labor content, and the rise of a global middle class.

Fast is fashionable – based in Galicia, Spain, Zara SA pioneered the concept of fast fashion. The idea is simple – take newly spotted fashion trends from concept to deliverable in a matter of days, rather than weeks or months. Most apparel retailers introduce four to six clothing collections per year. Zara introduces as many as 20. Such speed has propelled Inditex, the group that owns Zara, to the “world’s largest apparel retailer”.

To move quickly, Zara and other fast fashion retailers, have
to shrink their supply chains. They can’t wait weeks for shipments from faraway
suppliers. The retailers have come to depend on local – or even hyperlocal –
suppliers.

What’s next in fast fashion? Clothing-as-a-service. Most of my readers are not clothes horses, but we all have items in our closest that we will never wear again. So, why buy when you can rent? Rent The Runway is a subscription fashion service that will happily send you the latest fashions to use for a few days. Rent The Runway is even faster than Zara and even more dependent on hyperlocal suppliers.

By themselves, Zara and Rent The Runway won’t change our
global supply chains. But other manufacturers are likely to adopt their
business models. The “as-a-service” model is especially attractive. Uber and
Lyft provide transportation as a service. Quip provides toothbrushing as a
service. Salesforce provides software as a service. Google provides email as a
service. And let’s not forget that libraries provide books as a service. As the
“as-a-service” model proliferates, we’ll own less and use shorter, more
localized supply chains.

Changing Labor Content – labor arbitrage works best under two conditions: 1) different countries – those that supply manufactured goods and those that consume them – have widely different pay scales; 2) the item being manufactured requires a lot of labor. The second variable – labor content – has been shrinking rapidly as factory automation proliferates. Today, a fully automated factory in say, Viet Nam is not appreciably cheaper than a similar factory in say, Nebraska. Moving production offshore is less appealing when the bulk of the value in a manufactured item comes from services other than labor.

Changing labor content affects services as well as goods. Many
companies, for instance, have offshored their customer call centers to take
advantage of lower labor costs in other countries. But artificial intelligence
and improved voice recognition may soon change the economics of such decisions.
When we can talk to a robot without realizing it (which will happen soon), it
makes more sense to staff call centers with robots than with low-wage foreign
workers.

The Rising Global Middle Class – recent estimates suggest that some 42% of the world’s population – roughly 3.2 billion people – are now in the middle class. Global poverty is shrinking, and global buying power is increasing. This does two things: First, the wage differential between developing and developed countries is shrinking rapidly. This shifts the first variable in the labor arbitrage equation. Second, and more subtly, it shifts the demand location. More people in developing countries can now afford to buy locally produced goods and services. Rather than shipping goods overseas, local manufacturers now have a growing local market for their products.

As McKinsey and Co. point out, this trend reduces trade intensity – the proportion of goods that are produced in one country and sold in another. In 2007, for instance, China exported 17% of what it produced. By 2017, this figure declined to 9%.

What’s it all mean? Perhaps it means that our nascent trade wars are not necessary. Populist governments are trying to stop globalization through tariffs and other punitive measures. The tools are crude and outcomes uncertain. But the problem they’re trying to solve has already morphed into something different. Rather than solving yesterday’s problem through political means, it may well be better to just let the market trends play out.

The goal now is to take advantage of glocalization rather than to stop globalization. Trade intensity and labor arbitrage are both falling. We’re moving toward shorter rather than longer supply chains. Exports of manufactured goods are growing in absolute terms but shrinking relative to service exports and local consumption. We may see some decoupling of established international supply chains. Is glocalization good news? In many ways it is. The shift from global to local production will probably create local jobs and even greater personalization. As always, there are risks as well. Ed Luce, writing in the Financial Times, quotes an old saying, “When countries stop trading goods, they start trading blows.”